News to Know
LENDING
Will Credit Unions Tempt IRR Gods With Longer Auto Loans?
MICHELLE A. SAMAAD
msamaad@cutimes.com
more than 200 credit unions
nationwide.
Colby acknowledged not everyone is buying brand new cars.
With generous, transferable war-ranties, many used vehicles are a
very good deal, he said. Used vehicle loan growth is up 9.1% year
over year, and this has accounted
for 33% of all credit union loan
growth since March 2012.
Still, for those consumers that
want the latest model, some
lenders are meeting their requests by providing longer than
usual loan terms. According to
Experian Information Solutions
Inc., the average new car loan
was 65 months during the fourth
quarter of 2012. Seventeen percent of new car loans were 73 and
The Rundown
Y Industry leaders express heightened
concern with long-term loans.
Y Average car on the road is roughly 11
years old.
Y Subprime is the fastest growing lending
category.
hat two-door hatch-
back with the spiffy,
cushy interior bought
back in 2003 may be on
its last wheels.
And if industry data offers any
proof, more drivers are turning in
their clunkers for newer models.
That transition is helping to fuel
car loan growth for credit unions
and other lenders.
“Consumers
have to replace
vehicles at some
point,” said Dave
Colby, chief econ-
omist at CUNA
Mutual Group.
“Yes, the vehicle
fleet has aged, but
stronger new vehicle sales should
help stabilize if not bring down
the average age of 10. 8 years
noted by Polk,” a tracker of auto-
motive industry data.
Equifax reported that the continued demand for new cars from
consumers ready to replace their
10-year old vehicles, on average,
has helped auto loans grow to
$207 billion.
Colby said the good news is
new light-vehicle sales on an annualized rate appear to be holding above the 14. 5 million unit
rate.
“I believe at and above this
level, manufacturers back off financing. This is evident in recent
credit union new vehicle lending
activity,” Colby said.
Year over year through March,
the new vehicle portfolio at credit
union was up 11.2%, Colby noted.
At this time last year, contraction
was 4.0%.
“Pent up demand is certainly
contributing to higher vehicle
sales as consumers look to re-
place their aging vehicles. I be-
lieve that it is lend-
ing, however, that
is driving sales,”
said Jeff Mar-
tin, president of
Autoland Inc., a
Chatsworth, Calif.-
based auto buying
CUSO that serves
Colby
Martin
pected cost-of-funds as well as
competitive market conditions,”
he explained. “Don’t compete
Equifax reported that the continued demand for
new cars from consumers ready to replace their
10-year old vehicles, on average, has helped auto
loans grow to $207 billion.Colby said the good
news is new light-vehicle sales on an annualized
rate appear to be holding above the 14. 5 million
unit rate.
84 months in the first quarter of
this year, the Wall Street Journal
recently reported, adding a few
extended out to 97 months.
Martin said the majority of Autoland’s partners offer maximum
terms of up to 72 months and perhaps to 84 months at times, if the
member is creditworthy. Terms
up to 97 months are still rare, he
added.
“Low rates have made vehicles
more affordable, and while our
partners are always looking to
generate more quality auto loans
for their pipeline, I have seen little evidence of a trend towards
the availability of terms greater
than 72 months or an occasional
84 months,” Martin said.
Credit unions that offer these
longer durations with a fixed rate
may make them vulnerable to additional interest rate risk, Colby
cautioned.
“Loans will need to be fairly
priced based on current and ex-
directly with a financing arm
that is getting their margin from
sources other than spread, for
instance, zero percent for 84
months.”
Indeed, rates in general are
about as low in the prime market
as they can be, Martin said. As a
result, some lenders have begun
to get creative with the availabili-
ty of above average finance terms
to further lower the borrower’s
monthly payment.
Credit unions that offer these longer durations with
a fixed rate may make them vulnerable to additional
interest rate risk, Colby cautioned. ‘Loans will need
to be fairly priced based on current and expected
cost-of-funds as well as competitive market
conditions,’ he explained.
deteriorate, Zabritski said. However, one thing most lenders will
agree upon is that today’s subprime borrower is less delinquent
than those in the past, she added.
Meanwhile, Martin said anoth-
er concern for longer-term loans
would be on the qualification and
repayment side. A creditworthy
member with a modest income
who is more aware of their bud-
“If a credit union is considering
expanded terms, I would recom-
mend that they proceed thought-
fully by evaluating interest rate
risk and other risk factors, prior
to expanding into that realm,” he
offered. n
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